On certification to the Superior Court, Appellate Division, whose opinion is reported at 197 N.J. Super. 296 (1984) (A-67), and on certification to the Superior Court, Law Division (A-69/146).
For reversal and remandment in the Sayreville case -- Chief Justice Wilentz, and Justices Clifford, Handler, O'Hern and Stein. Not participating. For reversal in the Meglino case -- Chief Justice Wilentz, and Justices Clifford, Handler, O'Hern and Stein. Not participating. The opinion of the Court was delivered by O'Hern, J.
The central issue in these appeals is whether a municipality that operates its own water or sewer-treatment works may include in its rate or connection charges for a service area of the community a component to recover portions of the capital costs of the system.
The Appellate Division in Meglino v. Township Comm. of Eagleswood, 197 N.J. Super. 296 and Law Division in Kaplan & Sons Constr. Corp. v. Borough of Sayreville essentially held
that unless the municipality were to create an authority to operate the works, it could not include a capital-recovery factor in its rates or connection fees. Principal to these courts' concern was that a capital-cost component in the rate system partakes of the nature of a special assessment not imposed equally on every affected property owner, within the defined statutory procedure applicable to special assessments. The decisions noted that utility authorities have been expressly authorized to include such capital components in their rates and connection fees. The courts reasoned that the absence of a comparable express power in municipal enabling legislation limited the municipal operator of the water or sewer works desiring to impose charges to recoup the costs of construction in one of four ways: by incorporating a water or sewer authority, enacting a local-improvement ordinance, absorbing the cost generally, or through some combination of each to reach the desired result.
We believe, however, that the goals and purposes of the special-assessment measures can be harmonized with the municipal-ratemaking power in a way that enables a municipality to recover from a sector of the community a just and fair share of the costs of capital construction. Accordingly, we reverse the judgments below. Further consideration of the reasonableness of the schedule of rates and charges proposed by each municipality shall be conducted in accordance with this opinion.
The two cases present contrasting examples of the varied situations in which the problem may arise. The Borough of Sayreville is a community in mid-growth. Situated on the Route 9 corridor in Middlesex County, it has a strong existing industrial base and growing commercial and residential potential. It has owned and operated a water works and sewer-treatment system since the early part of this century. Sayreville constructed those systems in part with bond proceeds and in
part with cash out of revenues created from its general tax base. For many years it included the entire costs of owning, operating, and retiring the incurred costs of building the sewer-system works in its general operating budget. Although the Borough constructed the water system in part as well with general revenue and bond proceeds, it also imposed water service charges upon customers to recover its cost.
The Township of Eagleswood, on the other hand, was until recently a rural community. Located in southern Ocean County between the Pinelands Reserve and Little Egg Harbor, it does not have a strong industrial or commercial base. It has never had city sewers. The Township's setting attracted a number of year-round and summer residents to its waterside.
Each of these communities has chosen to deal with its needs in different ways. Eagleswood's first concern was to combat an increasing source of water pollution that arose from the development of a portion of its community known as the Dock Road area. This portion of the town, along Barnegat Bay, is characterized by moderately intense residential development. Building elevations are actually below mean sea level. The geologic conditions are uniquely unsuited for continuing septic treatment. The municipality applied for and received approval to construct a collection system to serve the estimated 175 users in the Dock Road area. The Ocean County Sewerage Authority's plan is to provide interception and treatment services for the less-developed area of the county. Eagleswood, like other southern Ocean County municipalities, need only get its waste into the county interceptor.*fn1
The Township of Eagleswood proposed an approximately $1.4 million project that would pick up the wastewater from the Dock Road area and carry it to the county interceptor. It applied for and received federal and state funding in the form of loans and grants in the following sums: an $818,075 EPA grant, a $78,849 DEP grant, and a $340,700 loan from the Farmers Home Administration. That left an unfunded balance of $147,000. The latter two items prompted this litigation. In constructing its rate schedule, Eagleswood introduced an ordinance with two features that are relevant here. First, it proposed an annual rate charge that would include capital recovery of the FmHA loan. Together with estimated operating expenses, the total annual charge was proposed to be $354 per year, per home. Second, it proposed a one-time connection charge in the amount of $600 per dwelling, designed to recoup the $147,000 incurred by the municipality in extending the works to this area.
The plaintiffs are some of the residents of the Dock Road area. In addition to challenging the impeller-pump agreement as mentioned above, supra n. 1, they challenged the rate schedules and connection charges in the Superior Court. The trial court held that the Eagleswood ordinance provided for a "fair and equitable means of funding" the connection project. It found the general language of N.J.S.A. 40:63-7 to be sufficient authority for a municipality to assess the unreimbursed costs of the project against its initial users.
On appeal, the Appellate Division reversed. In that court's view the municipality had the power to construct the sewers as a public improvement, but not to impose the proposed charges to pay for the improvement. The court held that N.J.S.A.
40:63-7 "cannot be read as delegating to municipalities the unregulated right to recoup the cost of construction of a system." Meglino v. Township Comm. of Eagleswood, 197 N.J. Super. 296, 305 (1984) (emphasis in original). Specifically, the court found that
[f]or that purpose the Legislature has given a municipality four options; first, to create a municipal utility authority under N.J.S.A. 40:14A-1 et seq.; second, to enact a local improvement ordinance under N.J.S.A. 40:56-1 et seq.; third, to absorb the cost of the sewer system as a general improvement; and, fourth, to use a hybrid approach, financing part of the costs locally and the balance generally. [ Id. ]
Sayreville has a different problem. It has an existing water and sewer-treatment works but both facilities are at or near capacity. Moving to provide service to new areas of the community, the Borough proposed by ordinance that new connectors to the system pay a one-time connection fee designed, in the municipality's view, to represent a fair-share contribution that would place new customers on an equal footing with those whose user fees and taxes had contributed to construction of the existing works. Plaintiffs are a group of developers and purchasers who will be affected by the charge. They contend that the proposed permit-connection fees of $500 for the sewer system and $590 for the water works are unauthorized charges that discriminate against new developments and exceed the municipal power. While the Sayreville case was pending in the trial courts, Meglino was decided by the Appellate Division. Bound by that decision, the trial court in Kaplan & Sons concluded that the proposed connection fees could be imposed only either by an authority or through the special-assessment or general-assessment procedures discussed in the Meglino opinion. It therefore granted summary judgment in favor of the developer-plaintiffs.
We granted certification to review the Appellate Division judgment in Meglino, 101 N.J. 290 (1985), and we granted direct certification of the Kaplan & Sons case, 101 N.J. 293 (1985),
because of the similarity of issues. The cases were scheduled for argument and disposition together.
We must note at the outset the limited role that courts have in reviewing municipal rates for utility services. "[A]n ordinance establishing [such] rates * * * will be upset only if patently unreasonable." H.P. Higgs Co. v. Borough of Madison, 188 N.J. Super. 212, 222 (App.Div.), certif. denied, 94 N.J. 535 (1983); see Seton Co. v. City of Newark, 194 N.J. Super. 499, 506 (App.Div.), certif. denied, 99 N.J. 152 (1984). The principle applies equally to the provisions of sewer and water service. See Freehold Borough v. Freehold Township, 193 N.J. Super. 724, 727-28 (App.Div.1984) ("'[a] municipality has plenary statutory power to charge for the use of sewerage facilities, * * * subject only to the general restriction against patent unreasonableness'") (quoting Crowe v. Mayor & Council of Sparta, 106 N.J. Super. 204, 206 (App.Div.), certif. denied, 55 N.J. 79 (1969)).
The reason that courts should defer to municipal decisions as to how to operate their utilities (at least within municipal boundaries) stems from the structure of government. Unlike those of private utilities, the rates that municipal utilities charge their customers are not subject to review by the Board of Public Utility Commissioners. "In such cases the Legislature may not regard the need for local consumer protection as compelling. If the resident consumer-voter does not like the management or the rates, he can vote the governing body out of office, and thus achieve reform." In re Complaint by Township of Morris, 49 N.J. 194, 204 (1967) (citation omitted). Within these parameters we review the two classes of charges proposed here.
The accounting principles applicable to public water or sewer rates and connection fees were described in broad outline by Justice Haneman in Airwick Indus., Inc. v. Carlstadt Sewerage Auth., 57 N.J. 107, 120 (1970), appeal dismissed, cert.
denied, 402 U.S. 967, 91 S. Ct. 1666, 29 L. Ed. 2d 132 (1971). The purpose of annual charges "is to raise a sum sufficient to pay (1) all expenses of operation and maintenance and (2) the principal and interest on any bonds and to maintain reserves or sinking funds for the funding of the [utility] Authority debt." 57 N.J. at 120. The former charge reflects the actual use of the system for water or sewerage disposal. The latter has its source in the original construction and installation costs for which bonds presumably were issued and sold. The principal and interest on these obligations represent that cost. Id.
The Airwick Court found it apparent that there should be two sources from which to raise the required funds in order that the charges remain equitable and uniform. Id.*fn2 It reasoned that those properties actually using the system should alone absorb the cost of operation and maintenance since the expenditure for such purposes arises solely for that use. On the other hand, all properties, whether actually tying into the system or not, should absorb the debt cost. 57 N.J. at 120.
The basis for the Court's conclusion lay in the fact that the debt represents the costs of construction and installation, from which every property receives some benefit and increase in value. Id. The Court noted that part of the construction costs are obviously necessary to provide for adequate future service for unimproved properties as well as improved lands. The Court concluded that unimproved properties, therefore, although ...